Banking Efficiency and Financial Growth Nexus: A Case of Islamic Banking in Pakistan

Abstract

Measuring the banking efficiency and its impact on financial growth is a burning issue in the modern era of financial management. Due to an increase in policy rates in Pakistan, the banking sector has developed financial innovations that has enhanced the competition in the banking industry. The research aims to observe the nexus between banking efficiency and financial growth, further the present study identifies the determinants of banking efficiency in Pakistan. The present study used secondary data of twelve Islamic banks from 2011 to 2022. The study shows that lagged credit risk and trade have a positive impact on cost-to-asset ratio, while lagged interest rate has a negative impact. The lagged total assets of Islamic banking share have significant negative impact on bank deposits and private credit. Further the study concludes that Islamic banking system has positive impact on growth but negative impact on the poverty gap. However, the lagged Islamic banking share of gross loans negatively impacts the poverty gap and headcount. Islamic banking can help to promote economic growth by increasing bank deposits and private credit.